Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 4: The Nature and Sources of Competitive Advantage
(Chapter 6 – The Nature and Sources of Competitive Advantage)
1. What is competitive advantage? How can a company build its competitive advantage?
Competitive advantage is a condition that enables a company to operate in a more efficient or
responsive manner than its competitors. A company that has a competitive advantage will be able
to attaina higher potential of earning and profit. A company can build up its competitive advantage
both externally and internally. When there are changes in the external environment, such as
changes in customer demand, prices and technology, a company can gain competitive advantages
by having unique resources, or responding faster and more effective than its competitors.
Internally, the company can also gain strategic advantages by the adoption of an innovation
strategy through more research and development, innovation in management, exploration of new
markets and a reconfiguration of its value chain.
2. Describe the different stages of industry development.
The various stages of industry development reflect the life cycle of the industry. In general, there
are four stages of industry development: introduction, growth, maturity, and decline. In the
introduction stage, sales are small and the rate of market penetration is low because the industry’s
products are little known and customers are few. The growth stage is characterised by accelerating
market penetration as product technology becomes more standardised and prices fall. Ownership
spreads from higher income customers to the mass market. Increasing market saturation causes the
onset of the maturity stage and a slower growth rate as new demand gives way to replacement
demand. Once saturation is reached, demand is wholly for replacement, either by customers
replacing old products with new products or by new customers replacing old customers. Finally, as
the industry becomes challenged by new industries that produce technologically superior substitute
products, the industry enters its decline stage.
3. What are various ways of expanding a company’s business internationally?
An important part of an international strategy is the method that the company will use to enter
foreign markets. There are four possible methods of international market entry: exporting,
licensing, joint venture and foreign direct investment. There are two ways to export: selling
products or services directly to an international company or customer, or indirectly by using export
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agents or intermediaries which include commissioned agents, distributors and trading companies.
Licensing (including franchising) is a contractual arrangement of a right under that trademark name.
In return, the trade mark owner receives marketing benefits and earns royalties on the sale of that
product or service. A joint venture with an already established overseas business may be the most
effective way to gain entry into a foreign market. These are local businesses which know the
market, have the distribution framework in place and less capital is required. Foreign direct
investment requires either establishing a company’s own facility in foreign market to be under its
direct control. The cost is high and the company has to bear all the risks of the operations in the
overseas subsidiaries.
4. How would you describe corporate-level competitive advantage?
The scope of activities associated with corporate-level strategy is to define the overall positioning of
the company in relation to the markets it is serving. An example of activity to achieve this
positioning is by developing new products for the target market and by exploring new markets (for
example, venturing to other international markets).
5. Select examples of two types of industry that have similar resources and capabilities offer less
opportunity for competitive advantage than industries where change is rapid and companies
are heterogeneous, and look for any evidence that intercompany profit differences are wider
in dynamic, heterogeneous industries than in stable, homogeneous industries.
An example of a stable industry in which companies have similar resources and capabilities is the
catering industry. Restaurants (including large food chains like McDonald’s), no matter how big they
are, can hardly dominate the catering market, unlike Apple Inc or Microsoft do so in the computer
hardware and software businesses. An example of a rapid change and heterogeneous industry is the
Internet business. For instance there were quite a number of competitors in the web search engine
market about 10 to 15 years ago (e.g. Yahoo, Alta Vista, and Bing) but eventually Google dominates
the market.
6. Businesses in fast-cycle markets will have different differentiation features and influences
than those in standard-cycle markets. List some of the features in each and discuss the
differences.
Fast-cycle markets:
– There are intense and rapid competitive moves by competitors operating in the fast-cycle
markets (changes are rapid);
– Products and innovations cannot be protected;
– Imitation occurs very quickly, competitors are counterattacking to an organisation’s
innovation(s);
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– Competitive advantage is easily eroded and destroyed;
– A way to achieve competitive advantage (although temporary) is to achieve this quickly at
the start when coming up with new products, because of the volatility of hypercompetition
– Innovation is the key.
Standard-cycle markets:
– Firms compete in high-volume markets that experience severe competition;
– However, the change of pace to disruptions is not that quickly;
– Products and innovations have measured barriers to competitive imitation;
– Due to changes that do not happen quickly, products and services can be protected in order
for a firm to achieve strategic advantage over time;
– A way to achieve competitive advantage is for the firms to continue their investments in
resources and capability strengths to create such advantage over time;
– Continuous investments in people through upgrading in skills, using process technology, and
general organisational know-how will assist them to sustain their advantage over the
competitors over time;
– Strategic investments in new and related products and processes will also enable the firms
to maintain their competitive advantages longer.
7. Australian Discount Retail (a discount store), Jusco (a Japanese grocery discount retailer), and
Primark (a UK discount clothing chain) have pioneered ‘cheap chic’ — combining discount
store prices with fashion appeal. What are the principal challenges of designing and
implementing a ‘cheap chic’ strategy? Design a ‘cheap chic’ strategy for a company entering
another market, for example, restaurants, sports shoes, cosmetics or office supplies.
Combining low cost with differentiation advantage is an attractive combination for any company.
The challenge is to pull it off. Differentiation typically adds cost – in improved design, variety,
quality, or some other attribute. A cheap chic strategy is not a simple combination of a cost
leadership strategy and a differentiation strategy. It involves the right kind of differentiation and
distinctive marketing mix.
Hence, for a cheap chic strategy to work requires that the differentiation gains compensate the
additional costs involved. For Australian Discount Retail, Jusco, and other successful exponents of
the cheap chic approach, the key is to maintain the basic model of a low-cost operator but to add a
few (but not all) of the distinguishing characteristics of more upscale operators. For example, in
fashion retailing, companies such as Primark produce “knock-offs” of new styles introduced by the
leading fashion houses of New York, Milan, and Paris.
However, reconciling stylishness and low cost can be difficult. It requires reconciling scale with
speed and nimbleness. In fashion retailing for example, it requires fast-cycle design, production, and
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distribution, and alertness to market trends. Major retailers do not have systems that permit such
speed and responsiveness. For a new restaurant chain a ‘cheap and chic’ strategy could involve
several approaches. For example, a restaurant can operate by adopting McDonald’s fast-food
model but offers a much higher standard of cuisine, or alternatively, it can start with an ambiance
and décor associated with more upscale restaurants but with a level of turnover and standardised
menu that permits low costs of operation.
8. The large German manufacturer of surgical equipment B Braun has been established in
Malaysia for quite some time. Given that German engineering represents some of the most
advanced processes in the world, why would B Braun be interested in Malaysia? What
competitive advantages will the company produce?
Malaysia offers the following advantages:
– Cost factor – it is relatively cheaper to manufacture the surgical equipment and other
products in Malaysia as compared to the home country (Germany).
– Learning opportunities – operating in Malaysia offers learning and development
opportunities arising from differences in the management of people and operations in
Malaysia and neighbouring countries;
– Scale economies – operating in Malaysia provides an opportunity to achieve a more efficient
production scale. Cost reduction is therefore possible and the company can become even
more competitive in offering cheaper products with equivalent quality in the home market;
– Scope economies – operating in Malaysia provides an opportunity for product diversification
(new products) so that the company can share investment and costs among its overseas
operations and develop shared learning across different activities.
The competitive advantage that the company will attain by operating in Malaysia will include:
– Extended customer base: with Malaysia’s geographical scope and situated within the
wealthy Asia Pacific region, B Braun is able to distribute its locally-made products to the
region with a lower cost. The combined population of Asia Pacific and the whole of Asia is far
greater than the size of the European market particularly when Europe is still reeling from
the global financial crisis effects. B Braun is therefore not limited by the population of
Germany (and Europe) and production capacity in its home country;
– Flexibility: This is one competitive advantage that can be achieved by B Braun by shifting its
production to another country. It can also extend the product life cycle so that older
products can be sold in less-developed countries;
– Innovation and learning: The company will be able to enhance its first-mover advantage and
become the only provider of new products associated with surgical equipment in Malaysia
and the neigbouring countries. It can also broaden learning opportunities for the company
to learn the diverse operating environments in other countries;
– Efficiency in operations: Economies of scale can be attained by the company from having
access to more customers and markets by operating in Malaysia. B Braun is also able to
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achieve competitive advantage by exploiting Malaysia’s resources including labour, raw
materials, know-how and land for operations and expansion.
9. Consider the changes that have occurred in a comparatively new industry (e.g. wireless
communications, video game consoles, medical diagnostic imaging, PDAs, online auctions,
bottled water, courier delivery services). To what extent has the evolution of the industry
followed the pattern predicted by the industry life cycle model? At what stage of
development is the industry today? How is the industry likely to evolve in the future?
With reference to the example of wireless communication, it is noted that wireless telephony was
introduced by small start-up companies (e.g. Nokia, Vodafone). The introductory phase featured
vertically integrated provision, incompatible technologies, high prices and low-quality service.
In Europe and Australia, regulation by the governments resulted in the convergence to a single
technical standard (e.g. GSM). In the US, compatibility between different technologies was
achieved, but the market system failed to establish a single technical standard (e.g. TDMA, CDMA,
and GSM coexisted).
The wireless communication market went through a growth phase as market penetration increased,
followed by slower growth once saturation was reached. Maturity involved increased price
competition, consolidation among leading players (together with an entry by several “virtual
operators”), and commoditisation of basic voice and text services. These changes correspond fairly
closely to the life cycle model. The main difference is that the industry is subject to periodic bouts of
technological change and new product introductions associated with new generations of technology
(e.g. 3G).
Looking to the future, maturation and commoditisation of basic voice services seems likely to
continue. However, market growth and opportunities for renewal and innovation are likely to result
from new technology. Key areas of growth will be mobile computing and mobile internet use. This
will cause the industry’s boundaries to be redefined and may well create opportunities for new
entrants.
10. Department stores (e.g. Anthony Horderns in Sydney, FitzGerald’s Department Stores in
Tasmania, Sogo in Japan) are facing increasing competition from specialised chain retailers
and discount stores. What innovative strategies might department stores adopt to revitalise
their competitiveness?
Department stores were the dominant form of general retailing during the first six decades of the
twentieth century. Since the 1980s, department stores have been increasingly displaced by
specialist chains and discount chains. Department stores lack buying power, parking space, and the
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operational efficiencies associated with streamlined supply chains and chain store formats. Can
department stores survive, or are they doomed to oblivion?
The starting point is to identify “distinctive differences” between department stores and other retail
formats that can then identify the relative strengths of department stores in terms of resources and
capabilities. These include:
 Reputation: Saks Fifth Avenue, Barney’s, Harrods, and Selfridge’s all have strong brand names
of their own which are distinct from the products they sell.
 Service: Department stores – especially the more upscale ones – are differentiated by a much
higher level of customer service than that found in most mass-merchandising chain retailers.
 Location: Most department stores have downtown locations.
 Product range: The key distinguishing feature of department stores is that they offer a much
broader range of products than more specialised retail chains.
 Attractive retail ambiance: Many department stores are in historic buildings, typically with
much more attractive (even luxurious) décor than most retail chains. Department stores need
to be able to effectively exploit these relative resource and capability strengths.
 Product focus: Department stores should focus on products either where price competition
from mass-merchandising retail chains is weak (e.g. musical instruments, designer clothing,
jewellery), or where opportunities exist for service differentiation (cosmetics, bridal wear,
customised furnishings).
 Customer focus: Department stores should focus on catering to those customer types that
prefer service and quality reassurance over low price.
 Emphasis on services: Department stores can place less emphasis on stand-alone producers
and more on bundling products with high-value services (e.g. providing facials and guidance on
make-up as well as cosmetic products; providing interior designers’ services as well as home
furnishings).
 Redefining relationships with suppliers: For branded-goods suppliers, department stores offer
attractive downtown retail environments for showcasing their new products. Hence,
department stores may be able to enter partnerships with their suppliers, which may involve
leasing concessionary space to the supplier, or providing other facilities and services for which
suppliers are willing to pay.